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Occasionally we see a group of fundamental factors coming together, supporting our model analysis. Such is the case with mining stocks, leading our group of sector ETF's this week. I will first review some background and look at the overall market. Next I will do our regular weekly in-depth look at our featured sector.

Background

Each week we provide a list of sectors including those that we expect to have the best performance over the next three weeks. ETF investors can check out the list and compare our findings with their own conclusions.

In our analysis, we consider Trends, Cycles, and a bit of Anticipation. While our ratings share characteristics with momentum and relative strength approaches, there are important differences. Since we apply the model to nearly 300 ETF's, we call it the TCA-ETF system. (For new readers, there is a more complete description of our methods at the end of the article. We also have a free report with more detail on the system and results, available on request.)

The model provides a nice feel for the overall potential of the market. It is not the forest nor the individual trees, but something in between.

[A few months ago we expanded the sector universe. We are implementing an approach with a unique choice for each sector. This is geared to finding the best trading opportunities, with special attention to time frame, cost, and trading frequency. I hope to have more information next week. I still expect to provide information on every ETF in the current list, whether or not it is part of the trading universe.]

The Macro View

From an overall market viewpoint, our indicators show strength, but continued risk. The key elements are as follows:

  • 96% of our ETF's in positive territory (up a touch from 91% last week). The median strength rating for the overall list is a plus 42 (up nicely from +32 last week). A score of "0" implies the average long-term ETF expectancy.
  • We see continuing risk, with 58% (equal to last week) of our sectors are in the "penalty box." This means that they are currently disqualified from the buy list for technical reasons. You can think of this as a sophisticated "stop loss" rule, often applied in advance. It also may indicate the need to take profits in a sector where we have done well, but see higher risk. See our article here for a further explanation of this method. We recently implemented some faster filters, accelerating moves both into and out of the Penalty Box. We are also changing some rules to cut down the frequency of trading.
  • Our index package is positive. For this rating we look at the ETF's (both long and short) for the S&P 500, the Dow, and the Nasdaq. You can see these ratings in the results table for this week (click to enlarge). Despite the positive ratings, we note risk in both directions. All of the index ETF's are in the penalty box.

This overall picture has been about the same for several weeks, but is showing continuing improvement.

Spotlight on the Miners

The mining group rose nicely in our ratings last week, and is now the highest-rated sector outside of our penalty box. We trade the miners via the SPDR S&P Metals and Mining ETF (NYSEARCA:XME). The fund is not highly concentrated, with the top holdings all below a 5% weighting. The P/E seems pretty rich at almost 34 with a dividend yield of only 0.8%. This is a bit deceptive, since many of the stocks are cyclical. Cyclical stocks have high P/E ratios in poor economic times and lower values at the top of economic cycles. The fund reports a 3-5 year earnings growth rate of only 11%, so it is certainly something to watch. This is especially true for those with a longer time frame. (We operate on a three-week forecast.)

Here is the chart (click to enlarge).

Xme

It is easy to see why the model likes the general strength of the sector. There is still plenty of room to run before reaching the pre-Lehman levels of 2008.

Other ETF Experts

I always take a look at comments from the ETF expert community for additional insight on our highlighted sector.

Tom Lydon's article, Mining ETFs: Time to Shine?, makes a number of good points. He wisely notes, in comparing the sector to GDX, that the miners are less susceptible to fluctuations in a single commodity.

Gary Gordon's piece, Time to Start Buying Mining ETFs?, has the same comparison and observation.

Great minds think alike!

I also especially like the fund's top holding, Allegheny Technologies (NYSE:ATI), which I own for longer-term client accounts.

Weekly TCA-ETF Rankings

We lost about 0.2% last week, compared to 1% loss for the S&P 500.

We provide these ratings as information for readers who may not trade as frequently as we do. Those signing up for our free weekly email update can also get the entire list.

As noted above, the macro market indicators are in the penalty box, and most other ETF's are in the penalty box. Based upon the current model signals (and noting the high risk levels), we have continued our bullish posture in the Ticker Sense Blogger Sentiment poll.

Here are the top sectors from our expanded universe of 280 ETF's. The list also includes the values for the broad market ETF's and their inverses (based upon Wednesday's close).

123009

Note for New Readers

Our weekly ETF Update is designed to assist both investors and traders interested in ETF's and Sector Rotation. Before turning to the current rankings, let us undertake a review for readers new to this series.

Our Method. In this past article, we described our basic methodology and why we believe the rankings are useful for fundamental traders and technical traders alike. While we urge readers to check out the entire article, the key point is that ETF's pose challenges and opportunities different from investment in individual stocks. The fundamentals may be more difficult to assess. Even with a good grasp on fundamental trends, there is a lot of technically-based trading in ETF's. This means that those trading with a fundamental approach (and we do this as well) want to monitor the "hot money" moves. Here is an article on that point.

The system synopsis. We look at Trending sectors, Cyclical Sectors, and build in an element of Anticipation for both entry and exit -- thus the name of the model, TCA-ETF. While we do not reveal the exact methodology for spotting trends and cycles, the system is not a "black box." The basic elements are used by many, and widely reported. We even discuss the need for human analysis as opposed to black box trading.

We report the rankings each week, now on the weekend with a one-day delay, using the Thursday output from the model. We monitor and trade this daily, and offer a free report (request via the email address on the top left of the site) for those interested in our weekly trading program.

Source: ETF Update: Mining for Investment Opportunity